Form N-CSRS
Pursuant to Rule 30b2-1 {17 CFR 270.30b2-1}
1. Investment Company Act File Number: 811-09189
2. Exact name of investment company as specified in
registration statement: Zazove Convertible Securities Fund, Inc.
3. Address of principal executive office:
1001 Tahoe Blvd.
Incline Village, NV 89451
4. Name and Address of Agent for Service:
Gregory Shorin
1001 Tahoe Blvd.
Incline Village, NV 89451
5. Registrant's telephone number: 775.298-7500
6. Date of fiscal year end: December 31
7. Date of reporting period: January 1, 2019 through
June 30, 2019
Item 1. Report to Stockholders
Zazove Convertible Securities Fund, Inc.
Semi-Annual Report
June 30, 2019 (Unaudited)
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
TABLE OF CONTENTS
Page
HISTORICAL RETURNS (UNAUDITED) 1-2
FINANCIAL STATEMENTS:
Statement of Assets and Liabilities 3
Schedule of Investments 4-8
Statement of Operations 9
Statements of Changes in Net Assets 10
Statement of Cash Flows 11
Notes to Financial Statements 12-21
Financial Highlights 22
PROXY VOTING POLICIES,DIVIDEND REINVESTMENT PLAN 23
Zazove Convertible Securities Fund, Inc.
Relative Historical Returns (Unaudited)
For the Periods Ended June 30, 2019
[A graph illustrates the relative performance of the Fund versus
the S&P 500 , Russell 2000 Index and Barclays Capital U.S.
Aggregate Bond Index for the one year, five year, ten year and
fifteen year periods ended June 30, 2019. As illustrated in
the graph, during this period the Fund's return was 3.76%,
0.20%, +7.65% and +5.83%, respectively, while the return of
the S&P 500 was +10.41%, +10.70%, +14.70% and +8.75%,
respectively,the return of the Russell 2000 Index was -3.35%,
+7.05%, +13.44% and +8.15%, respectively, and the return of
the Barclays Capital U.S. Aggregate Bond Index was +7.87%,
+2.95%, +3.90% and +4.27%, respectively.
[A graph illustrates the relative performance of the Fund
versus the S&P 500 , Russell 2000 Index and Barclays Capital
U.S. Aggregate Bond Index for the period January 1, 1999 through
June 30, 2019. As illustrated in the graph,during this
period the Fund's cumulative return was +384.73%, while the
return of the S&P 500 was +253.65%, the return of the Russell
2000 Index was +387.77% and the return of the Barclays
Capital U.S. Aggregate Bond Index was +158.34%.
The returns for the Zazove Convertible Securities Fund, Inc.
are presented after all fees and expenses.The returns of the
S&P 500 Stock Index, the Russell 2000 Stock Index and the
Barclays Capital U.S. Aggregate Bond Index are presented
after the reinvestment of dividends and interest. Past results
are not a guarantee of future performance.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2019 (UNAUDITED)
ASSETS
Investments, at fair value
(cost $44,698,686) $ 42,200,260
Cash and cash equivalents, at fair value
(cost $152,241) 152,241
Receivables:
Interest 128,126
Dividends 725
Securities Sold 1,172,330
Other Assets 3,464
Total assets 43,657,146
LIABILITIES
Payables:
Capital shares redeemed 1,330,748
Securities sold short,at fair value
(proceeds $565,837) 525,894
Transfer agency fees 7,125
Custody fees 650
Margin interest payable 1,497
Professional fees 29,995
Securities purchased 3,976
Other payable 309
Total liabilities 1,900,194
NET ASSETS $ 41,756,952
Analysis of Net Assets:
Common stock ($.01 par value; 25,000,000 shares $ 21,513
authorized;2,151,252 shares issued and outstanding)
Paid-in surplus 42,611,574
Accumulated net realized gain on investments
and securities sold short 1,357,634
Accumulated net investment income 224,714
Net unrealized depreciation on investments
and securities sold short (2,458,483)
NET ASSETS 41,756,952
NET ASSET VALUE PER SHARE
(based on 2,151,252 shares outstanding) $19.41
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
SCHEDULE OF INVESTMENTS
JUNE 30, 2019 (UNAUDITED)
Principal/ Fair
Shares/ Value
Contracts
INVESTMENTS - 101%
Convertible Preferred Stock - 4%
United States - 4%
Blueknight Energy Partners 11.000% 103,270 529,775
Cowen Group, Inc. 5.625% 1,020 926,925
NRC Group Holdings(144A) 7.000% (b) 3,700 375,550
Total Convertible Preferred Stock (cost $1,904,267) 1,832,250
Convertible Bonds - 77%
Bermuda - 1%
Teekay 5.000%
Due 01-15-23 586,000 468,675
Canada - 1%
First Majestic Silver 1.875%
Due 03-01-23 500,000 537,500
France-4%
Total S.A. (Reg S) 0.500%
Due 12-02-22 (e) 1,600,000 1,723,200
Germany-8%
Deutsche Bank AG London (JPM) 1.000%
Due 05-01-23 1,400,000 1,412,320
Siemens AG (Reg S) 1.650%
Due 08-16-19 (e) 2,000,000 2,096,000
Total Germany 3,508,320
Ghana -1%
Tullow Oil Jersey Ltd. (Reg S) 6.625% 400,000 465,500
Due 07-12-21 (e)
United States - 62%
Air Transport Services Group 690,000 703,351
1.125% Due 10-15-24
Altair Engineering 0.250% 240,000 261,112
Due 06-01-24
Atlas Air Worldwide Holdings 1.875% 630,000 648,506
Due 06-01-24
BioMarin Pharmaceutical, Inc. 0.599% 780,000 812,662
Due 08-01-24 (d)
Booking Holdings 0.350% 625,000 898,901
Due 06-15-20
Bristow Group 4.500% 550,000 115,500
Due 06-01-23 (a)
Caesars Entertainment, Inc. 5.000% 250,000 429,313
Due 10-01-24
Cowen Group, Inc. 3.000% 205,000 236,898
Due 12-15-22 (b)
Flexion Therapeutics 3.375% 1,400,000 1,222,375
Due 05-01-24 (d)
HC2 Holdings (144A) 7.500% 500,000 409,075
Due 06-01-22 (b)
Hope Bancorp 2.000% 1,020,000 930,750
Due 05-15-38
IAC FinanceCo 2-A (144A)0.875% 850,000 855,313
Due 06-15-26 (b)
Illumina, Inc.-B 0.500% 820,000 1,267,709
Due 06-15-21
Insmed 1.750% 650,000 633,750
Due 01-15-25
InterDigital, Inc. (144A)2.000% 780,000 794,664
Due 03-01-20 (b)
Jazz Investments I 1.500% 800,000 792,000
Due 08-15-24
Kaman Corporation 3.250% 500,000 586,930
Due 05-01-24
Liberty Interactive, LLC (CHTR) 1.750% 500,000 624,917
Due 09-30-46 (d)
Liberty Media (LSXMA) 1.375% 1,500,000 1,687,500
Due 10-15-23(d)
Microchip Technology, Inc. 950,000 1,122,805
1.625% Due 02-15-27 (d)
NantHealth 5.500% 1,130,000 734,500
Due 12-15-21
NRG Energy, Inc. 2.750% 530,000 567,444
Due 06-01-48
ON Semiconductor Corporation 1.625% 530,000 645,935
Due 10-15-23
Palo Alto Networks 0.750% 1,170,000 1,235,052
Due 07-01-23 (d)
Par Pacific Holdings, Inc. 5.000% 750,000 975,000
Due 06-15-21
Pernix Therapeutics Holdings 530,000 15,900
4.250% Due 04-01-21 (a)
PRA Group, Inc. 3.500% 500,000 469,228
Due 06-01-23
RH 0.000% 700,000 638,785
Due 06-15-23 (c)
Silicon Laboratories 1.375% 200,000 249,000
Due 03-01-22
Splunk (144A) 0.500% 220,000 241,868
Due 09-15-23 (b)
Splunk (144A) 1.125% 600,000 670,860
Due 09-15-25(b)
Square 0.500% 950,000 1,137,031
Due 05-15-23
Supernus Pharmaceuticals 0.625% 700,000 683,037
Due 04-01-23
Team 5.000% 511,000 523,162
Due 08-01-23
Teladoc 1.375% 290,000 429,079
Due 05-15-25
Theravance Biopharma 3.250% 800,000 694,000
Due 11-01-23
Vitamin Shoppe, Inc. 2.250% 210,000 190,575
Due 12-01-20
Workday, Inc. 0.250% 300,000 448,800
Due 10-01-22
Total United States 25,583,287
Total Convertible Bonds (cost $32,467,536) 32,286,482
Convertible Bond Units - 3%
France-3%
LVMH Moet Hennessy Louis Vuitton SE (Reg S) 2,990 1,343,258
0.000% Due 02-16-21 (e)
Total Corporate Bond Units (cost $936,138) 1,343,258
Corporate Bonds - 0%
United States - 0%
Global Brokerage 7.000% 1,356,860 76,193
Due 02-08-23(a)
Total Corporate Bonds (cost $727,982) 76,193
Common Stock - 9%
China-0%
Emerald Plantation Holdings (c) 180,362 5,411
United States - 9%
Cinedigm Corporation (c) 5,001 6,751
Cumulus Media, Inc. (c) 70,000 1,298,500
Daseke (c) 14,600 52,560
Emmis Communication (c) 194,100 921,975
School Specialty, Inc. (c) 26,500 146,280
Urban One, Inc (c) 680,000 1,332,800
Total United States 3,758,866
Total Common Stock (cost $4,849,670) 3,764,277
WARRANTS - 8%
Luxembourg-1%
Willscot Corporation, $11.50 strike price, 225,470 549,019
expire 09-10-22 (c)
United States - 7%
Ashland Global Holdings, Inc., 2,260 12,414
$1,000 strike price,expire 03-31-29 (c)
Avaya Holdings, $25.55 strike price, 8,170 16,340
expire 12-15-22 (c)
Daseke, $11.50 strike price, 540,200 102,638
expire 02-27-2022 (c)
Hostess Brands, $11.50 strike price, 428,000 813,200
expire 11-14-21 (c)
Magnolia Oil & Gas, $11.50 strike price, 156,600 523,044
expire 7-31-23 (c)
NRC Group Holdings, $11.50 strike price, 92,500 153,550
expire 06-15-24 (c)
Verra Mobility, $11.50 strike price, 160,000 648,000
expire 10-17-23 (c)
Total United States 2,269,186
Total Warrants(cost $2,848,177) 2,818,205
Call Options- 0%
United States-0%
Weibo, $50.00 exercise price 100 42,500
expire 01-17-20 (c)
Total Call Options (cost $180,090) 42,500
Escrow-0%
China-0%
Sino Forest Corpotation escrow 1,180,000 3,688
Georgia-0%
MIG LLC escrow 5,158,766 25,794
United States - 0%
TerraVia Holdings 5% escrow 690,000 6,038
TerraVia Holdings 6% escrow 180,000 1,575
Total United States $7,613
Total Escrow (cost $784,826) 37,095
TOTAL INVESTMENTS (cost $44,698,686) 42,200,260
SECURITIES SOLD SHORT - (1%)
Common Stock - (1%)
Canada-(1%)
Magnolia Oil & Gas Corporation (45,414) (525,894)
Total Common Stock (proceeds $564,030) (525,894)
Call Options - 0%
United States - (0%)
Pernix Therapeutics, $2.50 exercise price, (53) 0
Total Call Options (proceeds $1,807) 0
TOTAL SECURITIES SOLD SHORT (proceeds $565,837) $(525,894)
(a) This security is in default and interest or dividends are
not being accrued on the position.
(b) 144A securities are those which are exempt from registration
under Rule 144A of the U.S. Securities Act of 1933. These
securities are subject to contractual or legal restrictions
on their sale.
(c) Non-income producing securities.
(d) All or a portion of these securities are pledged as
collateral for the margin account held by the broker.
(e) Reg S securities are those offered and sold outside of the
United States and thus are exempt from registration under
Regulation S of the U.S. Securities Act of 1933. These
securities are subject to restrictions on their sale.
Percentages are based upon the fair value as a percent of
net assets as of June 30, 2019.
See notes to financial statements. (concluded)
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)
INVESTMENT INCOME:
Interest $224,309
Dividends 93,840
Other 182,767
Total investment income 500,916
EXPENSES:
Custody Fees 5,262
Director Fees 9,000
Insurance expense 2,461
Management fees 364,387
Margin Interest 28,104
Professional fees 31,572
Transfer agency fees 59,977
Dividend expense 2,606
Other 15,287
Total expenses 518,656
NET INVESTMENT LOSS (17,740)
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND SECURITIES SOLD SHORT:
Net realized gain on investments 1,286,469
Net realized gain on securities sold short 71,216
Net change in unrealized appreciation
of investments and securities sold short 4,758,859
Net realized and unrealized gain from
investments and securities sold short 6,116,544
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $6,098,804
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)
NET INCREASE IN NET ASSETS
RESULTING FROM:
OPERATIONS:
Net investment loss $(17,740)
Net realized gain on investments 1,357,685
and securities sold short
Net change in unrealized appreciation 4,758,859
of investments and
securities sold short
Net increase in net assets 6,098,804
resulting from operations
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income 0
From net capital gains 0
Return of capital 0
Net decrease in net assets resulting from 0
distributions to shareholders
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 150,192
Reinvestment of distributions 0
Payments for shares redeemed (4,265,515)
Net decrease in net (4,115,323)
assets resulting from capital
share transactions
NET INCREASE IN NET ASSETS 1,983,481
NET ASSETS - Beginning of the year 39,773,471
NET ASSETS - End of period $41,756,952
ACCUMULATED NET INVESTEMENT INCOME $224,714
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from $6,098,804
operations
Adjustments to reconcile net
increase in net assets resulting from
operations to net cash provided
by operating activities:
Net change in unrealized appreciation (4,758,859)
of investments and securities sold short
Net realized gain on investments and securities (1,357,685)
sold short
Net amortization and accretion 111,519
Purchases of investment securities (26,925,565)
Proceeds from sale of investment securities 33,194,070
Purchases of securities sold short (1,467,588)
Proceeds from sale of securities sold short 2,022,563
Changes in assets and liabilities:
Decrease in receivables 125,619
Decrease in other assets 2,686
Decrease in due to broker (3,645,147)
Decrease in payables (20,768)
Net cash provided by operating activities 3,379,649
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares sold 150,192
Payments for shares redeemed (3,378,464)
Payments for distributions to shareholders 0
Net cash used in financing activities (3,228,272)
NET INCREASE IN CASH AND CASH EQUIVALENTS 151,377
CASH AND CASH EQUIVALENTS - Beginning of year 864
CASH AND CASH EQUIVALENTS - End of period $152,241
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:
Cash paid during the period for interest $ 28,104
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2019 (UNAUDITED)
1. ORGANIZATION
Zazove Convertible Securities Fund, Inc., a Maryland corporation
(the "Fund") is registered under the Investment Company Act of
1940 as a diversified investment company that operates as a
closed-end interval fund. The Fund's investment objective is to
realize long-term growth, current income and the preservation of
capital. The Fund pursues this objective primarily through
investing in a portfolio of convertible securities. The
convertible strategy focuses primarily on opportunities in the
United States of America, although the Fund may hold foreign
securities. Zazove Associates, L.L.C. is the Fund's investment
advisor (the "Investment Advisor"). The Fund initially acquired
its portfolio pursuant to a merger whereby Zazove Convertible
Fund, L.P., a Delaware limited partnership registered under the
Investment Company Act of 1940, was merged into the Fund on
January 1, 1999.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation-The Fund's financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America and are stated in
United States dollars. The Fund is an investment company and
follows accounting and reporting guidance within Financial
Accounting Standards Board ("FASB") Accounting Standard
Codification ("ASC") Topic 946, Financial Services-Investment
Companies. The following is a summary of the significant
accounting and reporting policies used in preparing the
financial statements.
Use of Estimates-The preparation of financial statements
requires the Fund's management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of increases
and decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
Valuation of Investments-The valuation of the Fund's investments
is in accordance with policies and procedures adopted by and
under the supervision of the Board of Directors. Investments are
recorded at fair value.
Common stock, certain convertible preferred securities and
certain derivatives that are traded on national securities
exchanges are valued at the last reported sales price or, if
there are no sales, at the mean between the bid and ask prices.
Common stock, certain convertible preferred securities and
certain derivatives traded over the counter are valued at the
average of the highest current independent bid and lowest
current independent offer reported upon the close of trading on
that day.
Convertible bond securities, corporate bond securities, certain
convertible preferred securities and certain derivatives
are valued at the mid-point of independent bid and offer quotes
received from dealers or brokers who make markets in such
securities.
Securities for which market quotations are not available are
valued at fair value as determined in good faith by the
Investment Advisor with the oversight of the Board of Directors
pursuant to Board of Directors' approved procedures. In such
cases, fair value is derived based on all relevant facts and
circumstances including, among other things, fixed income and
option pricing models, enterprise valuation analysis, comparable
security analysis and conversion value.
Cash and Cash Equivalents-Cash and cash equivalents represents
cash held by the Fund's custodian in the amount of $152,241.
Since the Fund does not clear its own investment
transactions, it has established an account with a third-party
custodian (UMB Bank, N.A.) for this purpose.
Broker Balances-The Fund has established an account with a
prime broker (Citigroup) for the purpose of purchasing
securities on margin. At June 30,2019, the fund did not
have a margin account balance for securities purchased
on margin. The Fund pledges sufficient cash and securities
as collateral for the margin account, if any, held by the
custodian. As the valuation of such securities fluctuates, the
Fund may be required to pledge additional securities as
collateral.
Investment Transactions and Income-Security transactions
are recorded on the trade date. Realized gains or losses from
sales of securities (including securities sold short) are
determined on an identified cost basis. Dividend income and
expense is recognized on the ex-dividend date. Interest income
and expense are recognized on the accrual basis. Bond discount
is accreted and bond premium is amortized over the expected
maturity of each applicable security using the effective interest
method, as long as the collectability is not in doubt and the
security is performing in accordance with its contractual terms.
Indemnifications - Under the Fund's organizational documents, the
Fund is obligated to indemnify its directors, officers and
Investment Advisor against certain liabilities relating to the
business or activities undertaken by them on behalf of the Fund.
In addition, in the normal course of business, the Fund enters
into contracts that provide for general indemnification to other
parties. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. However, the Fund
has not had prior claims or losses pursuant to these
indemnification provisions and expects the risk of loss to be
remote.
Recent Accounting Pronouncements-In March 2017, the FASB issued
ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs
("ASU 2017-08"). The amendments in ASU 2017-08 require premiums
on purchased callable debt securities to be amortitized to the
security's earliest call date. Prior to this ASU, premiums and
discounts on purchased callable debt securities were generally
required to be amortized to the security's maturity date.
The amendments in ASU 2017-08 do not require any changes of
treatment to securities held at a discount. ASU 2017-08 is
effective on October 1, 2019, with early adoption permitted.
Although the Fund is still evaluating the effect of ASU 2017-08,
it does not expect the amendments to have a material impact on
its financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value
Measurement (Topic 820)-Disclosure Framework- Changes
to the Disclosure Requirements for Fair Value Measurements.
("ASU 2018-13"). The primary focus of ASU 2018-13 is to
improve the effectiveness of the disclosure requirements for
the fair value measurements. The changes affect all companies
that are required to include fair value measurement disclosures.
In general, the amendments is the ASU 2018-13 are effective for
all entities for fiscal years and interim periods within those
fiscal years, beginning after December 15, 2019. An entity is
permitted to early adopt the removed or modified disclosures
upon the issuance of ASU 2018-13 and may delay adoption of the
additional disclosures, which are required for public
companies only, until their effective date. The Fund is
currently evaluating the potential impact of this guidance
on the Fund's financial statements and disclosures.
3. FAIR VALUE MEASUREMENTS
FASB ASC Topic 820, Fair Value Measurement ("Topic 820"), defines
fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements.
Various inputs are used to determine the value of the Fund's
investments. These inputs are summarized in the three broad
levels listed below:
Level 1 - quoted prices in active markets for identical
securities
Level 2 - other significant observable inputs (including
quoted prices for similiar securities, interest
rates, prepayment speeds, credit risk, etc.)
Level 3 - significant unobservable inputs (including the
Fund's own assumptions in determining the fair
value of investments)
The inputs or methodologies used for valuing securities are not
necessarily an indication of the risk associated with investing
in those securities.
The following table summarizes the inputs used to value the
Fund's investments as of June 30, 2019:
Level1 Level2 Level3 Total
Convertible
Preferred Stock $529,775 $1,302,475 $0 $1,832,250
Convertible Bonds 0 32,286,482 0 32,286,482
Convertible Bonds Units 0 1,343,258 0 1,343,258
Corporate Bonds 0 76,193 0 76,193
Common Stock 2,279,786 1,484,491 0 3,764,277
Warrants 2,805,791 0 12,414 2,818,205
Call Options 42,500 0 0 42,500
Escrow 0 0 37,095 37,095
Total
Investments $5,657,852 $36,492,899 $49,509 $42,200,260
The following table summarizes the Fund's common stock industry
concentrations as of June 30, 2019:
Level1 Level2 Level3 Total
Cable & Satellite TV 2,220,475 0 0 2,220,475
Forestry & Paper 0 5,411 0 5,411
Media Content 0 1,332,800 0 1,332,800
Software/Services 6,751 0 0 6,751
Specialty Retail 0 146,280 0 146,280
Trucking & Delivery 52,560 0 0 52,560
Total Common Stock $2,279,786 $1,484,491 $0 $3,764,277
The following table summarizes the inputs used to value the
Fund's securities sold short as of June 30, 2019:
Level1 Level2 Level3 Total
Common Stock
Energy-Exploration $525,894 $0 $0 $525,894
& Production
Call Options 0 0 0 0
Total securities
sold short $525,894 $0 $0 $525,894
The following is a reconcilation of Level 3 assets for which
significant unobservable inputs were used to determine fair
value:
Warrants Escrow
Balance as of
December 31, 2018 $12,127 $43,343
Realized gain(loss) 0 0
Net change in appreciation 287 (6,248)
(depreciation)
Purchases 0 0
Sales/return of capital 0 0
Transfers into Level 3 0 0
Transfers out of Level 3 0 0
Balance as of
June 30, 2019 $12,414 $37,095
For the six months ended June 30, 2019, the net change in
appreciation (depreciation) included in net assets related to
Level 3 investments still held at the reporting date are as
follows:
Warrants Escrow
$287 $(6,248)
Topic 820 requires the following disclosures about fair value
measurements of assets and liabilities classified as Level 3
within the fair value hierarchy: quantitative information
about the unobservable inputs used in a fair value measurement.
The following table presents the quantitative information about
the significant unobservable inputs and valuation techniques
utilized to determine the fair value of the Fund's Level 3
investments as of June 30, 2019. The table includes Level 3
investments with values derived from third parties. Such
investments may be based on broker/dealer quotes for which
there is a lack of transparency as to inputs used to develop
the valuations. The quantitative detail of these
unobservable inputs is neither provided nor reasonably available
to the Fund.
Fair Value at Valuation Unobservable Amount/
Description June 30, 2019 Technique Inputs Range
Assets:
Warrant $12,414 Discount to Liquidity 50%
Black-Sholes Discount
pricing model
Escrow $25,794 Broker quote
Escrow $7,613 Bankruptcy Plan
The significant unobservable input used in the fair value
measurement of the Fund's Level 3 warrants is a
liquidity discount. A significant and reasonable increase or
decrease in the unobservable inputs for any of these Level 3
investments would result in a significant decrease or increase
in the fair value measurement.
The valuation process of Level 3 securities follows the valuation
of investments policy as disclosed in footnote 2.
4. DERIVATIVES AND HEDGING
The Fund follows the provisions of FASB ASC Topic 815,
Derivatives and Hedging ("Topic 815"), which requires qualitative
disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and
losses on derivative instruments and disclosures about credit
risk related to contingent features in derivative agreements.
As of and for the six months ended June 30, 2019, the Fund held
warrants which are considered derivative instruments under Topic
815. Warrants are convertible at the holder's option into a
fixed number of shares of the issuer's common stock upon payment
of the exercise price and are treated as convertible securities
by the Fund. Warrants held by the Fund were either purchased or
received pursuant to a restructuring or exchange transaction.
Equity price is the primary risk exposure of warrants. The fair
value of warrants as of June 30, 2019 was $2,818,205 and is
included in investments on the statement of assets and liabilities.
As of and for the six months ended June 30, 2019, the Fund held call
options which are considered derivative instruments under
Topic 815. Call options are an agreement that gives the Fund the
right (but not the obligation) to buy a common stock, bond,
commodity or other instrument at a specified price within a
specified time period. Equity price is the primary risk exposure
of call options. The fair value of call options as of
June 30, 2019 was $42,500 and is included in investments
on the statement of assets and liabilities.
Realized gains and losses on derivative instruments are included
in net realized gain on investments on the statement of operations.
Change in unrealized appreciation (depreciation) on derivative
instruments is included in net change in unrealized appreciation
of investments and securities sold short on the statement of
operations.
The following table summarizes the net realized gain
(loss) and net change in unrealized appreciation (depreciation)
on derivative instruments for the six months ended June 30, 2019:
Change in Net
Net Realized Unrealized Appreciation
Derivative Gain (loss) (Depreciation)
Warrants $0 $574,089
Call Options 6,678 (128,193)
$6,678 445,896
The following table summarizes transactions in derivative
contracts for the six month ended June 30, 2019:
Call
Warrants Options
Held as of
December 31, 2018 1,028,570 100
Purchased 584,630 6
Sold/exercised 0 (59)
Held as of
June 30,2019 1,613,200 47
FASB ASU No. 2011-11, Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities
("ASU 2011-11"), requires entities to disclose both
gross and net information for recognized derivative
instruments and financial instruments that are either
offset in the statement of assets and liabilities or
subject to an enforceable master netting arrangement
or similar agreement. ASU No. 2013-01, Clarifying the
Scope of Disclosures about Offsetting Assets and
Liabilities ("ASU 2013-01"), clarifies that the scope
of ASU 2011-11 applies to derivatives accounted for
in accordance with ASC Topic 815, Derivatives and Hedging,
including bifurcated embedded derivatives, repurchase
agreements and reverse repurchase agreements, and
securities borrowing and securities lending transactions.
As of and for the six months ended June 30, 2019,
the Fund did not hold any derivative instruments
that would require disclosure under ASU 2013-01.
5. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue up to 25,000,000 shares of common
stock, $0.01 par value. Shareholders are entitled to one vote per
share on all corporate issues put to vote of the shareholders,
although the Fund does not contemplate holding annual meetings to
elect directors or for any other purpose.
Upon approval of the Board of Directors, shares may be purchased
as of the first business day of each month at the then net asset
value per share. All subscription funds received after the first
business day of the month will be tracked as subscriptions
received in advance until the beginning of the following month,
at which time shares will be issued and the subscription will be
recorded as a component of net assets.
On a quarterly basis, the Fund will offer to repurchase no less
than 5% and no more than 25% of the Fund's outstanding shares at
the then net asset value per share. Notice of the terms and
conditions of each quarterly repurchase offer are sent to the
shareholders in advance of the offer. On May 15, 2019, the
Fund offered to repurchase shares as of June 30, 2019, which
are reflected as capital shares redeemed on the statement of assets
and liabilities. The Fund may impose a 2% fee on the redemption of
fund shares held for less than one year. This fee is intended
to compensate the Fund for expenses related to such redemption.
Shares are redeemed by treating the shares first acquired by
a shareholder as being redeemed prior to shares acquired by such
shareholders thereafter. There were no redemption fees charged
during 2019.
Distributions from the Fund are recorded on the ex-distribution
date. All ordinary and capital gain distributions are automatically
reinvested in Shares at the net asset value on the ex-distribution
date unless Shareholders elect in writing to receive such
distributions in cash.
In the case of the termination of the Fund, distributions to the
shareholders will be made in proportion to their respective share
ownership after the payment of all Fund creditors.
Changes in Shares Outstanding
Shares sold 8,089
Shares redeemed (226,173)
Net decrease (218,084)
Shares outstanding at the
beginning of year 2,369,336
Shares outstanding at the
end of the period 2,151,252
6. MANAGEMENT AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Zazove Associates, L.L.C. has been engaged as the Fund's
Investment Advisor and fund accountant pursuant to the terms of an
Investment Advisory Agreement. As Investment Advisor and fund
accountant of the Fund, Zazove Associates, L.L.C. received
management fees for the six months ended June 30, 2019
based on the following management fee schedule. Management fees
are computed and paid on a monthly basis based on the net
assets of the Fund as of the beginning of the month.
Net Assets
in Excess
of $20,000,000 Net Assets
First $20,000,000 up to in Excess of
Net Assets in Net Assets $70,000,000 $70,000,000
Annual management
fee rate 2.00% 1.50% 1.00%
On August 1, 2019, the Fund's directors unanimously approved an
amendment to the management fee schedule in the Fund's
Investment Advisory Agreement. Beginning August 1, 2019,
Zazove Associates, L.L.C. will receive management fees based
on the following management fee schedule.
Net Assets
First $20,000,000 up to
Net Assets in Net Assets of $20,000,000
Annual management
fee rate 2.00% 1.00%
As of June 30, 2019, certain employees and affiliates of the
Investment Advisor held 14.04% of the outstanding shares of the
Fund.
Transactions with related parties were conducted on terms
equivalent to those prevailing in an arm's length trancaction.
The Fund bears all normal direct costs and expenses of its
operations including: management fees; brokerage commissions;
custodian fees; transfer agency fees; legal, audit, accounting
and tax preparation expenses; applicable state taxes and other
operating expenses such as regulatory filing fees and costs for
communications with shareholders. The custodian fees and transfer
agent fees are paid to UMB Bank, N.A.
The overall responsibility for the management and operation of
the Fund is vested in the Board of Directors (the "Board"). The
Board consists of four directors: Gene T. Pretti, Andrew J.
Goodwin III, Jack L. Hansen, and Peter A. Lechman. Each of the
three directors who are not affiliated with the Investment
Advisor will receive $6,000 for their service to the Fund during
2018.
Gene T. Pretti, President, and Steven M. Kleiman, Secretary and
Treasurer, are the principal officers of the Fund and are
responsible for the day-to-day supervision of the business and
affairs of the Fund. Steven M. Kleiman is the Fund's
Chief Compliance Officer and is responsible for administering
the Fund's compliance policies and procedures. Except for certain
actions requiring the approval of the shareholders or the Board
of Directors, the principal officers of the Fund have the power
and authority to take all actions deemed necessary and
appropriate to pursue the Fund's objective.
Shareholders in the Fund will be unable to exercise any
management functions. There will not be any shareholder vote
unless required by the Investment Company Act of 1940.
7. INCOME TAXES
FASB ASC Topic 740, Income Taxes ("Topic 740"), provides
guidance for how uncertain tax positions should be recognized,
measured, presented and disclosed in the financial statements.
Topic 740 prescribes the minimum recognition threshold a tax
position must meet in connection with accounting for
uncertainties in income tax positions taken or expected to be
taken by an entity before being measured and recognized in the
financial statements. Topic 740 requires the evaluation of tax
positions taken in the course of preparing the Fund's tax returns
to determine whether the tax positions are "more-likely-than-not"
of being sustained by the applicable tax authority. Tax benefits
of positions not deemed to meet the more-likely-than-not threshold
would be recorded as a tax expense in the current year. The Fund
has not taken any tax positions that do not meet the
more-likely-than-not threshold. The tax years 2015 - 2018 remain
subject to examination by the Internal Revenue Service.
It is the Fund's policy to meet the requirements for
qualification as a registered investment company as defined in
Subchapter M of the Internal Revenue Code and to distribute
substantially all of its taxable income and capital gains to the
Fund's shareholders. Therefore, no provision for federal income
taxes has been made.
At December 31, 2018, the Fund had no undistributed
ordinary income, undistributed short term capital gains or
undistributed long term capital gains for federal income tax
purposes.
At June 30, 2019, the cost and related gross unrealized
appreciation and depreciation for federal income tax purposes
are as follows:
Cost of investments on Statement of Assets
and Liabilities $44,698,686
Amortization and accretion cost adjustments
not included in tax cost basis (198,552)
Cost of investments for tax purposes $44,500,134
Proceeds of securities sold short on 565,837
Statement of Assets and Liabilities
Gross tax unrealized appreciation 3,396,621
Gross tax unrealized depreciation (5,656,553)
Net tax unrealized depreciation on investments $(2,259,932)
8. INVESTMENT TRANSACTIONS
For the six months ended June 30, 2019, the cost of purchases
and proceeds from sales of investments were $28,356,118 and
$36,360,098, respectively. There were no purchases or sales
of long-term U.S. government securities.
9. OFF-BALANCE-SHEET AND CONCENTRATION OF RISKS
The Fund may engage in the short sale of securities. Securities
sold short represent obligations of the Fund that result in
off-balance-sheet risk as the ultimate obligation may exceed the
amount shown in the accompanying financial statements due to
increases in the market values of these securities. These short
positions are generally hedged positions against portfolio
holdings and, as a result, any increase in the Fund's obligation
related to these short positions will generally be offset by
gains in the related long positions.
At June 30, 2019, the Fund's investments by industry
concentrations (as a percentage of net assets) were as follows:
Pharmaceuticals 10.2%
Software/Services 9.5%
Media Content 7.2%
Cable & Satellite TV 6.8%
Tech Hardware & Equipment 6.3%
Electronics 6.1%
Banking 5.6%
Specialty Retail 5.6%
Diversified Capital Goods 5.0%
Integrated Energy 4.1%
Brokerage 3.0%
Medical Products 2.9%
Health Services 2.5%
Oil Refining & Marketing 2.3%
Media - Diversified 2.1%
Trucking & Delivery 2.1%
Food - Wholesale 2.0%
Air Transportation 1.6%
Oil Field Equipment & Services 1.5%
Aerospace/Defense 1.4%
Electric-Generation 1.4%
Building & Construction 1.3%
Metals/Mining Excluding Steel 1.3%
Gas Distribution 1.3%
Environmental 1.3%
Support-Services 1.3%
Cons/Comm/Lease Financing 1.1%
Transport Infrastructure/Services 1.1%
Energy - Exploration & Production 1.1%
Hotels 1.0%
Telecom - Wireless 1.0%
Chemicals 0.0%
Forestry/Paper 0.0%
At June 30, 2019, the Fund's securities
sold short by industry concentrations
(as a percentage of net assets) were as follows:
Energy-exploration & Production -1.3%
10. SUBSEQUENT EVENTS
In accordance with FASB ASC Topic 855, Subsequent Events,
management has valuated the impact of all subsequent events on
the Fund through the date the financial statements were issued.
Management has determined that there are no material events that
would require disclosure in the Fund's financial statements.
* * * * *
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
Five-Year Period Ended June 30, 2019
Six Months
Ended
June 30, 2019 2018 2017 2016 2015
Net Asset Value-
Beginning of Year $16.79 $18.76 $16.69 $14.93 $19.07
INCOME FROM INVESTMENT
OPERATIONS:
Net investment
income(loss)(a) (0.01) (0.13) (0.18) (0.03) 0.04
Net realized and
unrealized gains or
losses on investments 2.63 (0.97) 2.30 1.92 (3.66)
Total from investment
operations
2.62 (1.10) 2.12 1.89 (3.62)
Less distributions
to shareholders:
From net investment
income and short term
capital gains 0.00 (0.85) (0.00)* (0.13) (0.52)
From net
capital gains 0.00 0.00 0.00 0.00 0.00
Return of capital 0.00 (0.02) (0.05) 0.00 0.00
Total distributions
to shareholders 0.00 (0.87) (0.05) (0.13) (0.52)
Net Asset Value-
End of year $19.41 $16.79 $18.76 $16.69 $14.93
TOTAL RETURN(b) 15.60% (6.13)% 12.71% 12.68% (19.11)%
RATIOS/SUPPLEMENTAL DATA:
Net assets-
end of year $41,756,952 $39,773,471 $54,342,928 $53,825,244 $52,155,936
Ratio of expenses
to average net
assets(c) 1.22% 2.47% 2.42% 2.18% 2.27%
Ratio of net
investment income
(loss)to average
net assets (0.04)% (0.68)% (1.04)% (0.21)% 0.20%
Portfolio turnover
rate 55% 182% 132% 126% 89%
(a) Net investment income(loss) allocated based on average shares method.
(b) Total return assumes reinvestment of all dividends and distributions.
(c) Ratio of expenses to average net assets is determined including
margin interest. The ratio excluding margin interest, which is
a cost of capital, was 1.15% for the six months ended June 30,2019
and 2.26%, 2.22%,2.09%, and 2.01%,for the years ended December 31, 2018,
2017, 2016, and 2015, respectively.
(*)Distributions is less than $0.005 per share.
See notes to financial statements.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
PROXY VOTING POLICIES (UNAUDITED)
A description of the policies and procedures that the Fund uses
to determine how to vote proxies relating to portfolio
securities is available (i) without charge, upon request,
by calling 847.239.7100 and (ii) on the
Commission's website at http://www.sec.gov.
DIVIDEND REINVESTMENT PLAN (UNAUDITED)
Distributions from the Fund are recorded on the ex-distribution
date. Pursuant to the Fund's Dividend Reinvestment Plan
("DRIP"), all ordinary and capital gain distributions are
reinvested in Shares at the then prevailing net asset value.
Each Shareholder is automatically included in the DRIP unless
the Fund receives a written request from the Shareholder to receive
such distributions in cash, or cash and stock. In order
to determine the number of shares to be received by each
Shareholder that participates in the DRIP, the aggregate ordinary
and capital gain distribution allocated to the Shareholder that
is to be reinvested is divided by the Fund's Net Asset Value
per share immediately after giving effect to the aggregate amount
of the dividend distribution declared by the Fund. For federal
income tax purposes, dividends paid by the Fund are taxable
whether received in cash or reinvested in additional Shares
pursuant to the DRIP. There are no fees, commissions or
expenses associated with the participation in the DRIP and
Shareholders may elect to terminate their participation in the
DRIP by written request to the Fund. Additional information regarding
the Dividend Reinvestment Plan may be obtained by contacting
the Investment Advisor at 847.239.7100.
ZAZOVE CONVERTIBLE SECURITIES FUND, INC.
DIRECTORS Andrew J. Goodwin, III
Jack L. Hansen
Peter A. Lechman
Gene T. Pretti
OFFICERS Gene T. Pretti
Steven M. Kleiman
INVESTMENT ADVISOR Zazove Associates, LLC
1001 Tahoe Blvd.
Incline Village, NV 89451
CUSTODIAN UMB Bank N.A.
928 Grand Avenue
Kansas City, MO 64106
INDEPENDENT REGISTERED Deloitte & Touche LLP
PUBLIC ACCOUNTING FIRM 111 South Wacker Drive
Chicago, IL 60606
DIVIDEND-DISBURSING UMB Fund Services, Inc.
AND TRANSFER AGENT 235 W. Galena Street
Milwaukee, WI 53212
Item 2: Code of Ethics
Information required by this Item is only required in an Annual
Report on this Form N-CSR.
Item 3: Audit Committee Financial Expert
Information required by this Item is only required in an Annual
Report on this Form N-CSR.
Item 4: Principal Accountant Fees and Services
Information required by this Item is only required in an Annual
Report on this Form N-CSR.
Item 5: Audit Committee of Listed Registrants
Information required by this Item is only required in an Annual
Report on this Form N-CSR.
Item 6: Schedule of Investments. This information is included in
the Report to Shareholders in Item 1.
Item 7: Disclosure of Proxy Voting Policies and
Procedures for Closed-End Management Investment Companies.
Information required by this Item is only required in an Annual
Report on this Form N-CSR.
Item 8: Portfolio Managers of Closed-End Investment Companies.
Information required by this Item is only required in an Annual
Report on this Form N-CSR.
Item 9: Purchases of Equity Securities by Closed-End
Management Investment Company and Affiliated Purchasers.
Month Ending Total No. Avg. Price Total No. Maximum No.
Shares Paid Per Of Shares (or approximate
Purchased Shares Purchased value) of shares
As Part of that May Yet Be
Publicly Purchased Under
Announced the Plans or
Plans or Programs
Programs
January -0- * *
February -0-
March 157,613 $18.62 * *
April -0-
May -0-
June 68,560 $19.41 * *
* On a quarterly basis, it is a basic policy of the Fund
to offer to repurchase no less than 5% and no more than
25% of the Fund's outstanding shares at the then net asset
value per share. Notice of the terms and conditions of each
quarterly repurchase offer are sent to the shareholders in
advance of the offer. The Fund may impose a 2% fee on the
redemption of fund shares held for less than one year.
This fee is intended to compensate the Fund for expenses
related to such redemption. Shares are redeemed by treating
the shares first acquired by a shareholder as being redeemed
prior to shares acquired by such shareholders thereafter.
There were no redemption fees imposed during the period. It
is a basic policy of the Fund to offer on a quarterly basis to
repurchase no less than 5% and no more than 25% of the Fund's
outstanding shares at the then net asset value per share.
A Shareholder who desires to have Shares redeemed at the
close of a calendar quarter must submit a written request
by the 17th day of March, June, September or December,
as applicable (or the next business day if such day is
not a business day). Each such day is referred to as a
"Repurchase Request Deadline." The Fund will send a notice
to each Shareholder no less than twenty-one and no more than
forty-two days before each Repurchase Request Deadline with
the details regarding the repurchase offer. If the number
of Shares requested by the Shareholders for repurchase
exceeds the number of Shares in the repurchase offer, then
the Fund may repurchase an additional two percent of the
outstanding Shares. If there is still an excess, the Fund
will repurchase Shares on a pro rata basis. The Fund has
adopted written procedures reasonably designed to ensure
that the Fund's portfolio is sufficiently liquid to enable
the Fund to fulfill the repurchase requests. The Fund has
the right, under certain circumstances, to force the
redemption of all or a portion of the Shares held by a
Shareholder. The Fund may impose a 2% fee on the repurchase
of Shares held for less than one year, which fee is intended
to compensate the Fund for expenses related to such redemption.
Shares are deemed repurchased by treating the Shares first
acquired by a Shareholder as being repurchased prior to Shares
acquired by such Shareholder thereafter.
Item 10: Submission of Matters to a Vote of Security Holders.
No material change.
Item 11: Controls and Procedures
a) Registrant's principal executive officer and principal
financial officer have evaluated Registrant's disclosure
controls and Procedures within 90 days of this filing and
have concluded that Registrant's disclosure controls and
procedures (as defined in Rule 30a-2(c)) were effective
as of that date, in ensuring that the information required
to be disclosed by Registrant in this Form N-CSR was recorded,
processed, summarized and reported on a timely basis.
Registrant's principal executive officer and principal
financial officer concluded that such procedures did not have
any significant deficiencies or material weaknesses that
require corrective action.
b) There were no changes in Registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under
the Investment Company Act of 1940) that occurred during
Registrant's second fiscal quarter of the period covered
by this report that has materially affected, or is reasonably
likely to materially affect, Registrant's internal control
over financial reporting.
Item 12: Disclosure of Securities Lending Activities
Registrant did not engage in any securities lending for the period.
Item 13: Exhibits
(a)(1) Not applicable.
(a)(2) The certification required by Rule 30a-2(a)
under the Act (17 CFR 270.30a-2(a)) of each principal
executive officer of Registrant is attached.
(a)(3) Not applicable.
(b) No applicable.